Tax Withholdings and You!

Updated: Feb 24

(First things first! Let's get you over to the audio version of this post!)






It’s that time of the year again.

Which means today we're talking about payroll tax withholdings. This conversation becomes important when you’re on the path to financial independence.


There are also some big changes for 2020 that you’ll need to know about.


First, let's go over the basics of taxes.


Square One


  • Are you earning money?

  • Have you sold any property?

  • Did you pull money from a retirement account?


Then you’ll need to pay taxes on that money. You’ll fill out a tax withholding form so the IRS can receive a portion of your income. They’ll take what you owe in order to cover those taxes.


When tax filing season arrives (that dreaded time when your taxes are prepared), you’ll reconcile your income and deductions to verify how much you actually owe in taxes.


In other words, it’s determined whether you had enough taxes withheld during the year.


What happens if you didn’t have enough tax withholdings?


I hate to be the bearer of bad news, but you may owe the IRS some money.


What happens if you withheld too much?


Yeah! You may receive a refund!


Whatever you did with your money in 2019, it will all be reconciled in 2020 when you get your taxes done.


The last thing you want is to unexpectedly owe money. It can wreck your budget, your cash flow plans, make you dip into savings, or even go into debt.


It’s a bad start to the new year!


Withholding Too Much


Simply said… you're giving money!


  • It’s money you could’ve put into savings.

  • It’s money that you could’ve used to pay off debt.


There are people who use it as a way to save money. However, there are several reasons why this isn’t a solid plan.


Let’s look at those reasons.


  • You can’t use the money in case of an emergency.

  • The money could have been used to pay off debt.

  • You can’t make money on this account.

  • You can’t control this “savings account”


You can't tap into if there's an emergency and you can't make money on it.


Basically, you're giving away control of your money. You receive zero benefits from withholding too much and getting it back later.


That's why it's important to have your tax withholdings correct.


Any refund you receive was your money from the beginning.


The Break-Even Rule


Does break-even mean zero?

No…


I’ve never seen a tax return that had zero dollars as a refund or zero dollars due!


What does break-even mean?


It means not owing a lot and not receiving a big refund.


My advice is to shoot for a few hundred dollars in either direction. If you pay $300 too much and you get that back as a refund, no biggie. If you pay $300 under and you owe that amount at tax time, it’s not a big deal.


The idea is you've been saving money, so you’ll have the money to pay for it. The main idea is that you don’t want to swing too far in either direction.


That's why it's important to have your tax withholdings correct.


We aren’t aiming for surprises!



Forms


How do you make sure your withholdings are correct?


This is done by calculating the amount that you should withhold and filling out a W-4 form.


Let’s break down all the “W” forms.


If you're an educator receiving a paycheck, you filled out a W-4 form when you started working. This form tells your employer how much to withhold from your paycheck.


If you are a teacher that has a side hustle and you perform contracted services for others, you probably filled out a W-9 (before you were paid).


The W-9 is used so the person can report the amount they paid to the IRS and then also produce a 1099 form, which states how much you were paid so you can report on your tax return.


The W-2 form is issued to those that receive paychecks from their employers. As an educator who receives a paycheck, you’ll get a W-2 in the month of January.

These are issued at the beginning of every year. They let you know how much to report in your tax return.


Warning: The IRS also receives a copy of the W-2 (so make sure you report your earnings correctly).


Changes


Are you aware of the changes in 2020?


Let’s talk about how it was done back in the day:


In the past, the W-4 was used to tell your employer how much to withhold from your paycheck by stating your filing status.


You would indicate if you were single or married, then there were some lines to figure out your allowances.


At the end of the form, it would have single, zero or married, three.


You are able to mess with these numbers to have more or less withheld from your paycheck.


But things are going to change in 2020!


The IRS has a completely new W-4 form, where there are no more allowance numbers. You’ll be required to enter real dollar amounts.


Let’s take it step-by-step:


#1. Enter your basic data: address, social security number, and your tax filing status.


#2. You’ll document whether you have multiple jobs. The instructions state that you should use the amount from your highest paying job so that you get the most accurate withholding.


#3. Document dependents. This is the area to list your child tax credits.


#4. This is the area for all other adjustments, such as income from other sources. If you enter a $1 amount here, then your withholding will be calculated using that amount. You’ll also list your deductions if they’re above the standard deduction.


Then there is another sheet on this form where you can calculate your deductions and then you can list them in this section.


This is also where you can enter any extra amount that you want to have withheld from your check.


This form allows you to use dollar amounts to determine your withholdings. It’s going to be more work, but it allows for more accurate information!


Please do not forget to check in on your state withholding! Sometimes it's the same. Sometimes it's not.


No surprises.


Tell us what you think of the 2020 tax changes.


Leave a comment below!



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